Return on Fixed Deposits Outpace Inflation in July for the First Time in 15 Months

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In July, the return on fixed deposits in Kenya surpassed inflation rates for the first time in 15 months. Banks offered customers an average of 8.1 percent on long-term deposits, exceeding the month’s 7.3 percent inflation rate. This development indicates higher rates offered by lenders to attract long-term deposits, amidst competition for funds with the government and collective investment schemes. The positive real interest rate of 0.8 percent contrasts with a negative return over the past 15 months.

Key Points:

  • In July, Kenyan banks paid an average of 8.1 percent interest on long-term deposits, surpassing the month’s 7.3 percent inflation rate.
  • The positive real interest rate of 0.8 percent marks a shift from a negative return observed in the preceding 15 months.
  • Higher returns on deposits aim to incentivize depositors to channel significant funds towards lending to businesses and the government.
  • Recent National Treasury bond reopenings with maturity durations between two and five years have attracted substantial amounts, offering elevated interest rates of up to nearly 18 percent.
  • Commercial banks increased their base lending rates for seven consecutive months in July, reaching 13.5 percent, influenced by rate hikes by the Central Bank of Kenya (CBK) and rising returns on government securities.
  • The higher return on fixed deposits primarily benefits fund managers and large institutions, which constitute the majority of investors in these accounts.

Analysis: The shift in July where the return on fixed deposits in Kenya outpaced inflation for the first time in 15 months is a significant development for savers. This signals that banks are offering more competitive rates to attract long-term deposits, potentially indicating a shift in the interest rate environment. The positive real interest rate implies that savers are earning a return that exceeds the rate of inflation, which can help preserve the value of their savings over time. This may encourage individuals and institutions to consider longer-term deposit options. The impact on fund managers and larger institutions is noteworthy, as they are positioned to benefit the most from these higher returns.

BDA

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